The Act requires that the net value of the "matrimonial property" identified and valued (for the most part) at the date of separation should be divided fairly (where fair means equal unless there are special circumstances justifying an unequal yet fair outcome). In Scotland, the term "matrimonial property" is clearly defined and more often than not will not include all property owned by the couple. Since it is the net value of the whole which falls to be divided, that means that this is not an exercise in wielding a chain saw! You don't automatically get half the house, half the pensions, half the savings and half the car(!). What you get is a fair share (which may not be half) of the whole (on value). This usually means that each spouse will retain all of some assets and none of others. And that is where the challenge often lies...Is a pension pot valued at £100K worth the same as, more than, or less than £100K cash in the Bank?
In the classic case, the most valuable assets are the equity in the house and pension value built up in the course of the marriage. In order to illustrate the typical conundrum, if we assume the house is jointly owned and the equity is £300K, and the pension is with the husband who has been the principle breadwinner during the marriage and is worth £200K, and that it is an equal sharing case, then the pot is worth a total of £500K and each spouse can expect to walk away with 50%, ie £250K. Do we resolve this on the basis that the husband keeps his pension, the house is sold and he gets only £50K from the sale proceeds and on the basis that the wife keeps £250K from the sale proceeds? That is "fair" on the numbers but is it fair in the substance of what they have each got? What if the husband is age 40 and can't access any of his pension for another 15 years? He then has to pay some tax on what he draws down because one way or another at least 75% of his pension benefits will be taxable.
Similar problems can arise when considering other forms of illiquid assets. For example, shares held in a family business or a partnership capital account will have value on paper but will frequently be subject to severe restrictions on sale or withdrawal and not be accessible in cash (and then there is likely to be tax deducted). A share portfolio may be seen as a readily liquidated asset, but it may be pregnant with a capital gains tax liability. Family lawyers need to examine the nature as well as the value of each asset in turn because they are not simply numbers on a page.
A number of reported cases have over the years endeavoured to deal with the problem of resolving the balance between liquid and illiquid matrimonial property with mixed success. The one recurring challenge for family lawyers has tended to be pensions. The Welfare Reform and Pensions Act 1999 set out a framework for pension sharing for the first time and the enabling rules have been in place since only 2000. In simple terms, this enables a pension to be shared so that a chunk of the value of the pension held by one spouse can be transferred into a pension pot held by the other. It has proved to be a useful tool when trying to balance the books, but relies to a great extent on the claimant spouse being willing to accept an illiquid asset (pension value) in lieu of cash. Some spouses have little or no interest in any pension arrangement and will not be persuaded that pension sharing may be beneficial for them. In those circumstances it is important that pension advice is taken.
The March 2014 Budget has moved the goal posts in an unexpected and most welcome way! Those spouses who have defined contribution pension schemes (ie not Civil Servants, the Armed forces, Police, Firemen, Teachers, NHS employees and so on who have final salary schemes at present) will now be able to access their pensions as cash once they have attained the age of 55. In theory, the husband (if over age 55) in the above illustration could access his entire pension pot of £200K albeit he would need to pay tax at his marginal rate on any withdrawal above his personal allowances. This simple gesture on the part of the Chancellor has introduced an element of choice and flexibility into the argument about how to fairly divide liquid and illiquid assets. In practical terms it is likely to mean in my view that pensioners may take larger slices of income as their individual circumstances may require. This could be for example to assist a grandchild with school fees, or a child with wedding costs etc. As noted above it is not going to impact on everyone with a pension but it will provide a possible immediate cash resource for many older divorcing couples who have put the bulk of their savings into tax efficient pension schemes, and thus make it a little easier to find that sometimes elusive fair solution that works for both sides.
As a footnote, the political scaremongers have suggested that we will all be cashing in our pensions at age 55 and buying a Lamborghini (why a Lamborghini isn't immediately clear). I would suggest that is unlikely. Currently the on the road price for a Lamborghini Gallardo LP550-2 Coupe (bottom of the range) is a mere £135,600 or thereabouts. That would require the cashing in of about £220K of pension in order to generate the price of the car after tax. That makes it rather an expensive toy. However for the petrol heads amongst you, it does generate 543 bhp and takes you from 0-62 mph in only 3.9 seconds - not really long enough to give you time to reflect on whether you have spent your pension wisely. If you have any pension left you will need it to feed the combined 19.6 mpg.